Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Step 10: Spending in Retirement

What accounts should I spend from first? What are the consequences?

Conventional wisdom states that when you need funds in retirement, you should tap your taxable (i.e., non-retirement) accounts first, letting your IRAs and other tax-advantaged accounts enjoy tax-deferred growth as long as possible. In general, that's good advice -- but it may not work for everyone.

Let's review the steps you should take to determine your retirement spending strategy.

1. Know how much income you'll need, and where it will come from.How much will you spend? If you're planning for $50,000 a year in retirement expenditures, and you'll receive $25,000 from your pension and Social Security, the remaining $25,000 must come from your investments.

Before you tip into tax-favored accounts, estimate how much the income-producing investments (e.g., bonds and dividend-paying stocks) outside your retirement accounts will provide. Knowing exactly how much you need to withdraw lowers the chance you'll take out too much. Withdrawals from retirement accounts are a one-way street: once withdrawn, you have just 60 days to put them back. After that, you'll lose the tax advantages on any growth that money earns.

2. Estimate required minimum distributions.Uncle Sam gave you the gift of tax-deferred growth in your retirement accounts. Now it's payback time. By April 1 of the year after you turn 70 1/2, you must begin taking withdrawals from your traditional IRA and employer-sponsored retirement account. (You might be able to leave the money in the latter if you're still working.) If the combined balance in those accounts is large, delaying withdrawals could require very large withdrawals later, pushing you up into a higher tax bracket.

Project the value of your 401(k) and IRA account balances now to get an idea of how much you'll have to begin taking out once you become a septuagenarian. If those withdrawals will knock you up a couple of brackets, consider tapping those funds earlier. It may not cost you much in taxes, as long as you ...

3. Never leave a low(er) tax bracket unused.When you retire, you get to decide when to recognize income, and by how much -- the exact opposite of your working years. By selectively recognizing income, you can take advantage of the tax system's progressive nature (i.e., higher incomes get taxed at higher rates). Plus, thanks to the exemptions and standard deductions that everyone receives, some income is essentially tax-free. Attempt to smooth out your earnings so that you can consistently stay in the lowest tax bracket possible -- ideally 10% or 15%. Swinging back and forth between big bubbles of income recognition and zero-income tax years can cost you more over time.

4. Start with your employer plan over the traditional IRA.Withdrawals from these accounts are generally taxed the same way. However, some employer-sponsored plans have tougher withdrawal rules. For example, some 401(k)s limit withdrawal frequency to once a year, or even force you to adopt a fixed multi-year withdrawal schedule. Unless there are overriding reasons to the contrary (lots of materially appreciated company stock, or stellar investment choices), you're usually better off rolling over the money in an employer plan to an IRA.

5. Save your Roth IRA for last.Since the distributions from a Roth IRA are tax-free, Uncle Sam doesn't have a vested interest in your withdrawals, so you're not forced to take out the money at a certain age. For most people, then, it's best to leave the Roth alone and get that taxless growth as long as possible. Plus, there are estate-planning benefits to Roths, since they usually pass to heirs tax-free. In fact, you might want to make selective Roth IRA conversions when your taxable income is otherwise low.

6. Use software as a planning tool.It's tough to keep straight all the factors that determine the final number that appears at the bottom of your tax return. TurboTax, TaxCut, or any other tax-preparation software is your best friend when managing your tax bill. Though Congress changes the rules every once in a while, the latest tax software is still the best way to project what your tax situation will look like next year.

There are many more issues to consider when planning retirement withdrawals, including how company stock and annuities fit into the picture. You can read more about this in the Features section of the Rule Your Retirement service. There, you'll find the withdrawal strategies of three hypothetical retirees, plus how to calculate required minimum distributions. And you can see it all free with a 30-day trial.